Everything You’ve Always Wanted to Know About Financial Planning

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Creating a financial plan is a chore, no doubt about it. While even experienced analysts can create one in a week, entrepreneurs and beginners might spend three weeks on it. You might think, is it really worth it? "Yes, definitely. If you make a good financial plan, it will show you whether you should start your business or drop it, " says Martin Vapenik, the Chief Financial Officer at UP21, who has already seen hundreds of financial plans. We took him to task with an FAQ on financial planning.

Why should I create a financial plan?

Creating a financial plan is a good reason to sit down and think seriously about what your startup goal is, what stage you are in, what resources you need, how you will work with them and what you want to achieve. It also has a presentational function. With your financial plan in hand, you can reach out to banks and investors and explain why you need a certain amount of money and how you plan to spend it. A financial plan is also useful for communicating with your team and will also help you to develop key performance indicators; evaluate your work on an ongoing basis; and create marketing, recruitment and sales plans.

Isn’t it enough to have a business plan?

All startups are encouraged to create both documents because they complement each other. Business plans (about which we have written the two articles How to Create a Great Business Plan and Business Plan Is Not Alpha-Omega of Business) can be a great description of your business, but investors need numbers more than your words. A financial plan is actually a numerical representation of a business plan that reflects all areas of the business plan.

Is there any template I can use?

We know that you probably won’t like to hear it, but unfortunately there is not. Some aspects of financial planning are common for all startups, like establishing key inputs, operating costs, and a summary, but the main counting part is so specific that it has to be created by each startup individually. And this is, in fact, the main advantage. Why, you ask? If there were a generic template for everyone, it would surely make your work easier; however, you wouldn’t have to think as carefully about every detail of your business, resulting in a completely different plan from one you’d created yourself.

What should be included in a financial plan?

Each financial plan must include the following: direct and indirect costs; quantification of business and marketing strategies; pricing; revenues; financial statements including cash flow, income statement and balance sheet; three scenarios of development (realistic, optimistic and pessimistic); key performance indicators; and a summary.

When is the best time to create my plan?

According to economic theory, a financial plan should be created before an entrepreneur starts their business so that they know if it makes sense to do so. However, most people don’t follow economic theory and instead act based off their enthusiasm, so we recommend that you think about your financial plan as soon as possible. In the beginning, your plan can be relatively simple. If you have one product, three employees and a small office, one Excel sheet will do. Over time, the plan will be expanded and refined.

How often should I review and update my plan?

Your financial plan should be checked at least once a month. It’s good to look at the most important items: at whether you spend and produce as much as you planned as well as if the sales, number of customers and other key indicators match your projections. Once every three months, you should consult the plan more in depth and make changes where needed. Of course it's ultimately up to you, so nothing prevents you from looking at your plan every week.

Where do I get the numbers from?

Start from your own industry experience, from the experience of your acquaintances, and from the experience of experts as well as from expert articles, seminars and publications about your direct and indirect competition. The more independent resources you have, the better. At the beginning, the numbers may be slightly off, but over time you will develop more accurate figures. In most cases, you will not find any information about some items and will have to rely on your estimate, which is based on what you read and learned in communication with others. We recommend that you monitor these estimated parameters on a regular basis.

What should I do if my numbers don’t match?

You have to go through the financial plan again, find the bug and fix it. You might have made a numerical error when calculating, for example, or you used a bad formula, skipped some items, added a line by mistake, or counted one number twice. Try to find the error and make sure that next time you check the numbers continuously. If you have not found any numerical errors, the error may be in the logic, so try to use a different model to calculate. Another stumbling block is a bad guess – you couldn’t find a certain number, so you guessed it and it didn’t work out. Ask your industry colleagues or google for as long as you can find a more realistic number.

What period of time should my financial plan take into account?

In general, your plan should cover at least the period of investor financing. For startups in the initial phase, a financial plan is usually made for 12-18 months, but 2-3 years is optimal because investors want to know how the startup will develop even after you have exhausted their investment. It’s common for large startups to prepare a forecast for up to five years. These numbers won’t be very accurate, but that’s not the purpose. It’s more important to describe a long-term vision than to hit exact figures for five years ahead.

Will I be able to do it myself?

It depends on whether you enjoy mathematics or not. Now, seriously. As we wrote in our Startups FAQ article, "The basic calculation, which includes revenues, costs, and target margins, should be counted by entrepreneurs themselves. You should always try to make the financial plan in the simplest and most comprehensible way possible so that you can understand it well. Only then will you be able to answer any questions from investors.” If you don’t have much experience with financial planning, try asking friends with an economics background. But if you already have a running startup and want to pitch to investors, we recommend that you discuss it with a consultant. It’s not good to neglect the preparation of such an important document.

Do you have any further questions about financial planning? Feel free to write us on Facebook and we’ll get back to you asap.

Martin Vápeník is CFO at UP21. He helps startups with financial and strategic planning, financial managemen, cash flow plannin an assesment of investment plans.